Chapter 1

Introduction

Chapter One

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Economics and managerial decision making

Economics

The study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources

Chapter One

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall.

Economics and managerial decision making

Management

The science of organizing and allocating a firms scarce resources to achieve its desired objectives

Chapter One

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall.

Economics and managerial decision making

Managerial economics

The use of economic analysis to make business decisions involving the best use (allocation) of an organizations scarce resources

Chapter One

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall.

Economics and managerial decision making

Relationship to other business disciplines Marketing: demand, price elasticity

Finance: capital budgeting, breakeven analysis, opportunity cost, value added Management science: linear programming, regression analysis, forecasting
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Economics and managerial decision making

Relationship to other business disciplines Strategy: types of competition, structure-conduct-performance analysis Managerial accounting: relevant cost, breakeven analysis, incremental cost analysis, opportunity cost

Chapter One

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall.

Economics and managerial decision making

Questions that managers must answer:

What are the economic conditions in our particular market? market structure? supply and demand? technology?

Chapter One

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall.

Economics and managerial decision making

Questions that managers must answer:

What are the economic conditions in our particular market? government regulations? international dimensions? future conditions? macroeconomic factors?
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Chapter One

Economics and managerial decision making

Questions that managers must answer:

Should our firm be in this business? if so, at what price? and at what output level?

Chapter One

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall.

Economics and managerial decision making

Questions that managers must answer:

How can we maintain a competitive advantage over other firms? cost-leader? product differentiation? market niche? outsourcing, alliances, mergers? international perspective?
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Chapter One

Economics and managerial decision making

Questions that managers must answer:

What are the risks involved? shifts in demand/supply conditions? technological changes? the effect of competition? changing interest rates and inflation rates?
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Chapter One

Economics and managerial decision making

Questions that managers must answer:

What are the risks involved? exchange rates (for companies in international trade)? political risk (for firms with foreign operations)?

Risk is the chance that actual future outcomes will differ from those expected
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Economics of a business

The economics of a business refers to the key factors that affect the firms ability to earn an acceptable rate of return on its owners investment The most important of these factors are competition technology customers

Chapter One

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Economics of a business

Change: the four-stage model

Stage I (the good old days) market dominance high profit margin cost plus pricing

changes in technology, competition, customers force firm into Stage II ..

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Economics of a business

Change: the four-stage model

Stage II (crisis) cost management downsizing restructuring

re-engineering to deal with changes and move firm into Stage III ..
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Economics of a business

Change: the four-stage model

Stage III (reform) revenue management cost cutting has limited benefit focus on top-line growth ..

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Economics of a business

Change: the four-stage model

Stage IV (recovery) revenue plus revenue grows profitably

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Economics of a business

Example: Avon

well established company, in stage I until late 1970s found itself in Stage II during 1980s since mid 1990s, entered stage III expanded into emerging markets and updated its image
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Chapter One

Economics of a business

Example: Sears, Kmart

Wal-Mart effect Sears pushed down to number three in late 1980s repositioned itself as a clothing store Kmart filed for bankruptcy in 2002 plan to acquire Sears
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Chapter One

Economics of a business

Example: Kodak

struggled to transition from chemical-based film to digital imaging responded by developing strong cash flows in new product range

Chapter One

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Review of economic terms

Microeconomics is the study of individual consumers and producers in specific markets, especially: supply and demand pricing of output production process cost structure distribution of income
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Chapter One

Review of economic terms

Macroeconomics is the study of the aggregate economy, especially: national output (GDP) unemployment inflation fiscal and monetary policies trade and finance among nations

Chapter One

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Review of economic terms

Resources are inputs (factors) of production, notably: land labor capital entrepreneurship

Chapter One

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Review of economic terms

Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people Opportunity cost is the amount (or subjective value) that must be sacrificed in choosing one activity over the next best alternative
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Chapter One

Review of economic terms

Allocation decisions must be made because of scarcity. Three choices: What should be produced? How should it be produced? For whom should be produced?

Chapter One

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Review of economic terms

Economic decisions of the Firm

What - begin or stop providing goods/services (production) How - hiring, staffing, capital budgeting (resourcing) For whom target the customers most likely to purchase (marketing)
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Review of economic terms

Entrepreneurship is the willingness to take certain risks in the pursuit of goals Management is the ability to organize resources and administer tasks to achieve objectives

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Global application

Example: Western Union

began over 100 years ago huge changes in technology to survive, the company branched out

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Global application

Example: VNU

Dutch publishing company transformed itself into a global provider of marketing and media information

Chapter One

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